Due Diligence

Thanks to the merger with Bing/Microsoft, Yahoo! officially closes the doors on its Site Explorer tool. A message on their site says:

With the completion of algorithmic transition to Bing, Yahoo! Search has merged Site Explorer into Bing Webmaster Tools. Webmasters should now be using the Bing Webmaster Tools to ensure that their websites continue to get high quality organic search traffic from Bing and Yahoo!.

Would you like to know the secret to being more thorough and efficient with your due diligence when buying websites? It’s to drill down on the most important assets of a website. In order to explain this better, let’s first define what “assets” and “drill down” mean.

The assets of a website are generally closely tied to the reason you’re buying the site. Most assets of a site fall into one of the following categories:

Automation – e.g. Outsourced relationships, software

Scaling – e.g. SEO potential, systems

Diversity – e.g. Multiple sources of traffic, revenue

Monetization – e.g. Adsense income, member sales

Relationships – e.g. Email lists, rss readers, followers

Traffic – e.g. Organic traffic, referrals

Buzz – e.g. Links, Press

Intellectual Property – e.g. Products, content

I’ll talk more about these in a future post, but once you’ve identified which assets of a site are most important to you in your buying decision, then it’s time to drill down.

Here’s an example. Let’s assume you’re buying a website for its Adsense income. In order to drill down, we need to ask ourselves the question, “What causes this?”. Here’s how it would go with this example.

Question: What causes the Adsense Income?Answer: The organic traffic the site gets.

Question: What causes the organic traffic?Answer: The SEO of the site.

Question: What causes the SEO?Answer: The backlinks and content.

Question: What causes the backlinks and content?Answer: Hiring content writers and link builders.

Can you see how we drilled down to find the real source or cause of the Adsense revenue? In this case, it’s the content writers and link builders. At first glance, you might have assumed just looking at screenshots of the Adsense revenue would be all the due diligence you’d need to do. In reality, you also need to perform due diligence on the organic traffic, the SEO, the backlinks, the content, the content writers and the link builders. If you want to really take a shortcut, you could simply perform due diligence on the content writers and link builders because they caused everything else.

Can you see how important this concept is? Can you see how it can save you time and reduce your risk of being scammed when buying a site?

I know it works for me. I have a checklist of about 500 different due diligence items I can potentially check before buying a site, but I might not check 250 of them because they aren’t relevant to the assets that are important to me.

If you’d be interested in hearing more about those 500 due diligence items, let me know by commenting below. If there is enough interest, I’ll share some of them with you.

Whether or not we’d like to admit it, our world of buying and selling websites can be pretty sloppy at times. And as it pertains to arbitration and things just going bad in general with deals, nearly ALL of it stems from plain old sloppiness.

I’ll be the first one to raise my hand in guilt to admit that I’ve been too lazy, too trusting, too unorganized, and too uninformed in the past. Every deal I’ve lost money on, (even the ones that were “other people’s fault”), is a direct result of my own informal approach to the deal. Which I GUESS means it was my fault after all.

When you approach a transaction with all your ducks in a row, all your boxes checked, and all the stones overturned, the margin for error becomes very slim and all potential instances of arbitration over the deal vanish. So here’s a few things you should always make sure to do in any deal…

Due Diligence

This one is common sense, but goes at the top of the list. Approach the website (and it’s owner) as though you were conducting a criminal background check. That means you check out everything!

- The domain. I use domaintools.com to check for age, drops, registration matching the owner, etc. Then I use Market Samurai, Open Site Explorer, SEMRush, and SEO Spy Glass, to verify the incoming backlinks, the PR, the rankings, etc…

- The Seller. If you’re buying from Flippa or other online marketplaces, check feedback. Check their previous listings. Check their trust scores. GOOGLE THEM. Ask them LOTS of questions. Get to know them a bit. Is this the first site they’ve sold? Why are they selling it?

- The content. This one has bitten me in the rear before. Check Copyscape for duplicate content. Make sure it’s original. Make sure you have the right to use it. Make SURE it’s included in the sale!

- The Income. More and more, screen shots just aren’t doing it for me. I’m a serious buyer. Could you please take 60 seconds to make a screen recording of your affiliate dashboard, or your merchant account? I’d feel much better seeing it live…Especially if the account doesn’t come with the sale.

- The traffic. Same as income. Login, and show me. But I’m also gonna check sites like compete.com, alexa.com, quantcast.com, etc…I know they aren’t always the most accurate, but they should give me a general consensus as to whether or not the seller is telling the truth.

- The terms. Especially if it’s monetized with affiliate programs. Check out the affiliate programs terms. Check out any special payment arrangements the seller has with the vendor. Make sure those benefits transfer to you. Make sure the site isn’t in violation of those terms, etc…

I’m willing to bet that over 70% of website transactions, especially ones that originate in most marketplaces, don’t even utilize contracts. I suppose I understand why. Who knows how to write a contract? Who want’s to pay a lawyer? Can’t you get in trouble for ‘practicing law without a license?’

Getting a contract in place is one of the most important aspects of any deal. All of your protection (buyers and sellers) hinges upon the contents of this agreement, and it’s ability to be enforced. Having a lawyer that can draw up the contract for a few $100 is well worth it for larger deals. But even deals that are less than $10k need to have some sort of formal agreement.

At a minimum, I recommend you grab a templated contract from somewhere like Legalzoom.com, or Sitepoint.com. I’ve used these templated contracts many times. They’re written by professionals who know legal jargon, and cover most of the basics. It’s not ideal, but it’s better than going commando with nothing at all.

Record Conversations with Other Parties

This may seem a little anal, but having a skype chat, or a recording of a voice chat can come in handy when disagreements arise. When you begin working on a new deal, I recommend you create a file in your inbox to save all email correspondence as well. This little bit of extra work will settle any issues about what has been promised, and what hasn’t.

Third Party Verification of Stats

This falls under due diligence, but is really only necessary for large transactions. An accurate recasting of financial records, tax statements, etc, by a professional tax expert gives an added piece of security and peace of mind to everyone involved.

Listing Agreements with Brokers

If you’re dealing with a website broker, you’ll want to have their services clearly defined in a listing agreement. How long will you give them to sell your site? What commission do you agree to pay them if they are successful? Do they have sole and exclusive rights to sell your site during the term of the listing agreement, or are there exclusions depending on where the buyer comes from during that time frame?

Most website brokers shoot from the hip, and don’t even use listing agreements. However, most states require that a pre-approved one be used by any and all business brokers that deal in their states. (That means web based business brokers as well). It protects you and them…So if they don’t sign one with you, don’t work with them.

Payment Terms & Financial Checks

This falls under contracts, but is important enough to separate out by itself. Most large transactions need some sort of verification to be done on the buyer to prove they actually have the funds available to make the purchase. Even if they’re only making a down payment on the business, if it’s a substantial amount of money you should make a stipulation for payment in that amount to be made in full within a certain time frame after the signing of the deal.

This is just protecting the deal. You don’t want them to flake out on you half way through the transaction because they didn’t really have the money to back up the offer they made you. Or, worse yet, they were counting on a third party investor to pay for the site and that person wasn’t involved in negotiations. So at closing, they go to their “investor” friend, and to their surprise and yours, there’s no money available.

Ask them to send proof of their ability to pay you before signing the contract. And make sure to put a “payment due by” date in the deal. Not doing so is just leaving the door open for potential problems…aka, being sloppy to the point of hurting yourself.

Introduction to Business Employees & Content Providers

This can’t be done pre-sale often times because of confidentiality, and fear of employees leaving once they find out the business is for sale. However, having some plans to get to know them, or atl east ABOUT them, is only smart.

I purchased a large blog that had it’s content generated by a team of writers in the past. The writers had no clue the seller was selling the site, and when I stepped in, I had to re-staff the entire team because I was left short handed when several of the key contributors jumped ship. They were loyal to the original owner, and I was the new guy on the block. None of them were held by a contract to continue providing the great content they were providing, and because I didn’t have a plan for retaining their services when I became the owner, the business became a burden for me quickly.

GET TO KNOW THE TEAM BEHIND THE PROJECT. I can’t stress this enough. At a minimum, you need to have the selling owner feel out the employees for you to ensure the business’ stability post sale. Are they planning to stay? Will their compensation change? Will their responsibility increase or decrease? If you don’t have a plan, it can blow up in your face.

To wrap things up, a lot of what goes wrong in online business transactions is a result of sloppiness. Plan for the worst case scenario and many times by simply making that plan, you’ll avoid issues down the road. This list is by no means exhaustive, so there my be a part 2 of this article coming in the near future.

What are your thoughts? What do you do before a transaction to make sure the deal goes smoothly? Anything you would add to this article? Leave your thoughts in the comment section below.

The most commonly overlooked aspect of websites that generate their revenue via affiliate programs, is the affiliate program’s terms and conditions. Most of the time when a website changes ownership, the seller will include the affiliate account that is connected with the site to make things easier during the transfer for the buyer.

The problem comes when the buyer attempts to change the payment info from the seller’s details to their own. It’s not uncommon to be met with a few nasty surprises from the product vendor when they find out you’ve purchased a site connected with sales they receive via that affiliate account.

Let me give you two examples of how this has affected my own purchases, as well as those of my close mastermind partners.

Example #1: The Coupon Code

Last year I purchased a site that was generating decent revenue for a high ticket piece of software as an affiliate. The affiliate program tracks it’s sales by giving each of the affiliates a unique coupon code their visitors can use during checkout. If the visitor uses their coupon code, they get credited with the sale.

The seller had worked out a special arrangement with the vendor to use the coupon code “WSO”, which was cheaper than any other coupon available for other affiliates to use by $5. The vendor agreed to let this affiliate run a Warrior Special Offer at the Warrior Forum and receive credit for all the sales made with the WSO coupon code.

To boot, the thread at Warrior Forum ranks #1 in Google for “Product Coupon Code”. So this seller had a pretty sweet deal negotiated with the vendor. Every time someone would hit the checkout page and see the coupon box, they would go to Google and look for the cheapest coupon. Since it was $5 cheaper than the rest, and it ranked #1, the majority of sales made funneled through this affiliate account….Which is why I purchased it!

3 months or so go by without a hitch. I was even able to increase the number of sales this site generated using the WSO coupon code by nearly 2x. Things were looking great, and I was just about to break even on my purchase (after only 90 days), when the vendor decides to revoke my right to use the coupon code.

Turns out, it was a special arrangement between him and my seller, (who was buddy buddy with the vendor), and when the vendor discovered I was now receiving credit for the sales,…ZAP! Coupon Code revoked, income destroyed. I was in “violation of the affiliate terms and conditions” (which were conveniently updated), that say coupon codes cannot be transferred. Long story short: I got burned. Hard. And it was because I didn’t perform due diligence in respects to how the affiliate sales were being generated, and the arrangements between the vendor and my seller. I assumed all affiliates were treated equally. Lesson learned. They’re not.

Example #2: Cookie Stuffing

Another site purchased by members of our mastermind group here at FlipWebsites.com in the past year was a site in the learn guitar niche. The site had solid track record, great rankings, good traffic, tons of content and millions of views on the Youtube Channel.

We performed all the due diligence you normally would expect educated buyers to perform, except in regards to how the affiliate tracking was being manipulated by the seller that wasn’t disclosed originally.

The seller was cookie stuffing. For those of you who don’t know what that is, basically it’s placing your affiliate tracking pixel in the visitor’s browsers each time they come to your site, and if they purchase the product at some point down the road, you still get credit for the sale.

This isn’t such a horrible thing, especially if you’re doing pre sell work for that product and can legitimately make a case for having helped close those sales. Most people consider it grey hat at worst. However, most vendors don’t allow it. A few months after the sale, the buyers in our group that purchased the site were contacted by the vendors with a warning to cease stuffing cookies or risk losing the affiliate account altogether!

Imagine the surprise when they didn’t even know they were cooking stuffing in the first place. As a result, revenue has decreased for that site. The seller in this instance probably didn’t even know they were doing anything wrong either to be honest. But that proves the point of this post all the more. The devil is in the details we don’t check up on.

So next time you are looking to purchase a site with affiliate driven income, make sure to ask the seller if they have special deals worked out with the vendor on commission structure, coupon codes, payment dates and methods, etc.. etc.. Then make sure to ask the seller if their site adheres to all of the affiliate program’s terms and conditions (such as rules regarding cookie stuffing). Go to the vendor’s site and read the affiliate agreement yourself too! Leave no stone unturned.

A few months ago, I purchased toprankedhosting.net from Flippa.com for $1300. ($1250 + $50 for paypal fees) from a user that has since had their account suspended.

At first glance the site looked like a great buy. $350/month in net revenue, 2,000 unique visitors, pretty good domain name, with room for improvements in the SERPS…So I bit! After all, he had revenue proof in the form of screen shots from his Paypal account from Hostgator’s affiliate program, and traffic stats from his server.

My first mistake: Rushing the deal in order to win the auction

Normally (especially for larger transactions) I’d spend some more time doing my due diligence on the site before buying. But there’s something about the public auction format that causes us to act hastily some times. The level of competition can drive you to place a bid faster than you should in order to snag the deal, especially when it’s a smaller amount of money like the one in this example.

I broke so many of my own rules on this one, it’s no wonder I got scammed! Thankfully, justice has since been served, and I did get all my money back after about 3 months of detective work and legal action. So instead of highlighting the obvious red flags I ignored, like his lack of feedback, not checking copy scape, etc, etc…I wanted to show you how he initially got away with it.

The Re-used Stats Scam

After purchasing the site and installing my own analytics, I began to get a little worried after 3-4 days because the site got zero visitors. Not a single one…And the seller claimed 2,000 per month.

I tried to contact the seller, and had no response for several days. Egg on my face! Did he Photoshop the screen shots? How could this have happened to me? How could I have been so careless and not seen this before buying the site?

While digging through the various pages in wordpress, I stumbled across an internal link to another site I believe was owned by the seller. He forgot to change it out. The page wasn’t published inside wordpress so it was impossible for me to have seen it prior to purchasing the site.

I clicked through to check it out, and low and behold, another hosting affiliate site with the exact same content and page structure!

I WAS HOT!!!!

I attempted to contact the seller dozens of times with no luck. After reporting him to Flippa, and contacting my bank (because Paypal doesn’t insure digital goods), I was able to get it taken to court, and got my money back.

But how did he pass it off as a legit project?

My personal belief is that he took screen shots of earnings and traffic from his other affiliate site that actually was making the money and attempted to pass off the copy cat site as the real thing.

I’ve seen several other scam artists attempting the same thing lately. Be wise and learn from my mistake! NEVER buy a site in haste to beat out other bidders. If it goes before you have a chance to perform all the normal due diligence you would regularly do, let it go! And double check all screen shot “proof”. Make sure you verify it’s for the site you’re purchasing before placing a bid.